1. A 3 year-bond is paying a coupon rate of 10% per year semi-annually. The par value of the bond is R1000 and the annual market interest rate is 8%.
a) Calculate the price of the bond today and 6 months from now after payment of the next coupon?
b) What is the total rate of return on the bond?
2. Suppose you have a total investment of R10 000. You decide to put R2 500 in risk-free T-Bills which pays a return of 5%. The remaining R7 500 is invested in a stock portfolio as follows: Stock A , Amount Invested = R 2 500, Expected Return = 14%, Stock B, Amount invested = R3 000, Expected return = 15.34%, Stock C, Amount invested = R2 000, Expected Return = 12%.
a) Calculate the proportion of each investment (including the risk-free T-Bills) in the complete/overall portfolio.
b) Calculate the expected return of your investment in the stock portfolio and the expected return of the complete/overall portfolio.
c) If the standard deviation of your stock portfolio is 22%, what is the standard deviation of the complete/overall portfolio?
d) Draw the Capital Allocation Line (CAL) of your portfolio on expected return/standard deviation diagram. Remember to show the position of your stock portfolio and the complete/overall portfolio on the CAL.